Credit risk is the possibility of loss arising from the borrower’s failure to repay the loan or fulfill its contractual obligations. Traditionally, it refers to the risk that the lender will not receive the principal and interest owed. In this case, it causes cash flows to be interrupted and collection costs to increase.
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Credit risk management is a process by which lenders try to minimize this risk. This process attempts to determine which borrowers are eligible for loans by evaluating borrowers’ loan repayment performance.
It is difficult to know exactly who will and will not fulfill their obligations. Therefore, assessing and managing credit risk correctly reduces possible losses. Interest payments reflected to the person requesting the loan are the items determined in return for the lending institutions assuming the credit risk.
Understanding Credit Risk
When organizations offer mortgages, credit cards or other offers, they take into account the risk of the person not being able to repay his debt. Therefore, it is calculated based on the payment ability according to the main conditions of the loan.
Departments that evaluate the credit risks of current and potential customers of lending institutions have been established. Emerging technology provides organizations with the ability to quickly analyze data used to assess customer risk profiles.
What is Credit Reputation?
Creditworthiness tells you how suitable you are to apply for a loan or credit card. The decision institutions make depends on data about your credit history. There are three main points that are important here; credit report, credit score and payment history.
Your creditworthiness is what creditors look at before approving you for any new loan. Creditworthiness is determined by several factors, including your repayment history and credit score.
Payment history also plays an important role in determining creditworthiness. Lenders; They generally won’t consider giving a loan to someone whose history shows late payments, missing payments, and general financial irresponsibility.
Payment history accounts for 35% of your credit score. Therefore, it will be beneficial to keep the process under control, even if you have to pay the minimum amount.
Checking Credit Reputation
There are some credit reporting agencies that measure your creditworthiness. Lending institutions use these organizations in addition to their own credit scoring systems to approve loans. These organizations provide important information to access credit data on existing customers.
It is important for every consumer to monitor their credit score. Because it is a factor used by financial institutions to decide on suitability for the credit limits to be requested.
How to Increase Credit Value?
There are several ways to increase credit value. To build credibility and increase your credit score, you should pay attention to your payment history. You should make sure that any late payments do not reflect on your credit score. If you have overdue debts, you should create payment plans for them.
Your credit card usage balance should be 20% of your credit limit. Although the ideal rate is 10%, sometimes this rate may not be enough. You should also verify your Debt-to-Income ratio. An acceptable Debt-to-Income ratio is 28% – 35%.
What is the Debt-to-Income Ratio?: It is calculated by dividing your total monthly debt by your total gross monthly income. Financial institutions pay attention to this factor when evaluating the credibility of the individual requesting a loan.
Once credibility is lost, it is difficult to restore it. Therefore, you can follow the tips below to keep yourself under control.
One of the simple steps to getting the best credit score is to use a credit card. The following steps may be guiding for this:
- Add an automatic payment order for your credit card: You must enter an instruction to automatically pay the entire credit card balance from your bank account every month.
- Never close a credit card account: Closing credit card accounts damages your credit history. Instead, you can keep your account open by switching to a credit card with no annual fee.
- The more credit you have, the higher your score: As you get used to using a credit card and always paying in full, you can start to build your credit. Remember, you should do this in a controlled manner and when you believe you can afford it. You can request an increase in your credit limit by applying for a new card from a different bank.
How to Calculate Credit Score?
Five important factors are taken into account when calculating your credit score:
- payment history,
- Total amount owed,
- Length of credit history,
- Loan types,
- new loan
Payment history accounts for 35% of your credit score. It shows whether the person pays on time or not. The total amount owed is 30%. It takes into account the percentage of credit available to a person. Longer credit histories are considered less risky because there is more data to determine payment history. Therefore, length of credit history accounts for 15% of the calculation. The type of credit used accounts for 10% of the credit score. New credit is also 10% of the score. It also affects how many new accounts a person has.
Your credit score is a number that can make or save you a lot of money throughout your life. A perfect score gets you lower interest rates. This means you’ll pay less for any line of credit you take out.
